Speech Summary Low Inflation in a World of Monetary Stimulus
Speech to the Goldman Sachs Annual Global Macro Economic Conference
The speech looks at the current economic climate in these ‘very unusual times’. It begins by exploring some of the reasons behind the current global policy environment before addressing the implications for the Australian economy.
The current global monetary environment is summarised as one in which there has been a very large monetary stimulus, interest rates are very low and inflation is subdued. Consideration is given to what the current situation says about the effectiveness of global monetary policy. It suggests that changes in monetary policy are not affecting decisions about saving and spending as they have previously done. This can be partly explained by the high levels of debt and increased uncertainty following the financial crisis. The importance of structural reform and improving the climate for investment at a global level are then discussed. And the speech posits that whilst monetary policy can help support the global economy, it cannot be the fundamental driver of economic growth.
In exploring the implications for the Australian economy, the speech discusses the effect of global monetary policy developments on the configuration of the exchange rate and interest rates, and ultimately asset prices. Particular consideration is given to how the upward pressure on the Australian dollar from developments overseas has ‘complicated’ the transition of the economy following the mining investment boom. Discussion then turns to how the loosening of monetary policy has supported the domestic economy and worked to partly offset some of the upward pressure on the Australian dollar from developments abroad.
The speech points out that the same factors that are affecting the transmission of monetary policy globally are evident in Australia. Attention is paid to the behaviour of households – both borrowers and savers – before there is discussion of the impact on Australian wages. Despite the transmission mechanism looking somewhat different, it is emphasised that domestic monetary policy is still working and helping to support the local economy.
In conclusion, the speech posits that the solution to the problem caused by the ‘disconnect’ between the desire to save and invest does not lie in monetary policy, but in measures to improve the investment environment so that there is ‘strong productive demand’ for the use of savings.